Deficit-Cutting Panel Girds for Failure

A high-profile effort to trim stubborn U.S. budget deficits appeared near collapse Friday as Democrats and Republicans were unable to agree on tax increases and benefit cuts.

A 12-member supercommittee in Congress has until midnight Wednesday to strike a deal that would save at least $1.2 trillion over 10 years. Members say they think a deal is still possible, but aides privately are more pessimistic.

Friday is shaping up to be a make-or-break day, one super committee member said.

"We should know by end of today, and I'll give myself until 11:59 p.m., as to whether or not there will be a deal," Democratic U.S. Representative Xavier Becerra said at a renewable-energy conference.

Congress is already facing rock-bottom approval ratings after a year of down-to-the-wire budget battles, and failure to reach a deal would likely incite further disgust among voters as the 2012 election season heats up.

Unlike budget standoffs in April and August, failure would not lead to a government shutdown or a sovereign debt default.

Instead, automatic spending cuts of $1.2 trillion over 10 years, split evenly between military and domestic programs, would kick in starting in 2013.

Many Republicans, along with Defense Secretary Leon Panetta, warn that those cuts could compromise national security. Senator Pat Toomey, a leading Republican on the super committee, said on Thursday he would try to modify them, presumably to ease their impact on the military.

Programs for the poor and the elderly, such as Medicare and food stamps, would be largely shielded from the automatic cuts. Some liberal groups say they would be less painful than a deal that affects those programs and Democrats say the automatic cuts, known as a sequester, should stay in place.

"Trying to undo the sequester is a total shirking of responsibility," Representative Chris Van Hollen, a top Democrat on the panel, told National Public Radio.

Democrats also believe they have an advantage because tax cuts enacted under President George W. Bush are due to expire at the end of 2012, and Republicans want to overhaul the tax code before then to avoid higher rates for the wealthy.

Toomey said Friday a deal was still possible. "It's not going to be easy," he told CNN. "Time is running short but it hasn't run out yet."

But a senior Democratic aide said the two sides are nowhere near an agreement.

MARKET REACTION UNCLEAR

It's not clear how investors would react to failure.

Markets plunged in August after a divisive battle over extending the government's borrowing authority prompted ratings agency Standard & Poor's to issue a first-ever U.S. debt downgrade. The other two major agencies have said they would not necessarily follow suit if the super committee deadlocks, as long as the automatic cuts are allowed to kick in.

Investor expectations are extremely low, which might limit the scope of market reaction. Most are distracted by the ongoing debt crisis in Europe, which may ensure a safe-haven bid for Treasury bonds and the dollar even if the committee fails to agree on substantive cuts.

However, the automatic cuts may be seen as another negative for the U.S. economy and could roil the stock market.

Failure to reach a deal also would make it harder for Congress to extend a range of provisions, from payroll tax cuts to enhanced unemployment benefits, due to expire at the end of the year. Economists warn that the economy could suffer if those measures are not kept in place.

There is a third option. Super committee members could set aside divisive issues like taxes and benefits and put together a much smaller package containing measures both sides easily can agree upon, such as selling off radio and television frequencies and cutting federal pensions and farm subsidies.

That would reduce the severity of the automatic spending cuts.

On Friday morning, super committee members emphasized their areas of disagreement even as they said a deal was possible.

Toomey warned that the tax increases the Democrats are seeking would hurt the fragile economic recovery.

"The real driver of this entire problem of course is excessive spending," he said on CNN. "I'm not sure we should harm the economy in order to do the right thing for the entitlements."

Van Hollen said Democrats would not accept the wholesale overhaul of Medicare and other benefit programs that Republicans want.

A high-profile effort to trim stubborn U.S. budget deficits appeared near collapse Friday as Democrats and Republicans were unable to agree on tax increases and benefit cuts.
A 12-member supercommittee in Congress has until midnight Wednesday to strike a deal that would...